save or pay up?

[donotpassgo]

We are currently sitting on a deposit for our first home worth £22K.

We also have debts of £11K built up from when DH was made redundant, then studied for 3 years.

We now both work (me part time) and the household income is around £55K.

Our question is whether we use some of our deposit (which was given to us by my parents-in law) to completely clear our debt, or continue to chip away at it. (We pay around £650 off each month)

My worry is that we will struggle to repay the deposit money in time to make the deposit equal to >15%, but equally we will not get a mortage with £11k debt.

Any advice gratefully received.

Mathematically you are always better off paying off debt, unless of course it means you borrow more at a higher rate of interest. That £650 would fund a decent mortgage but 11k wouldn't be much of a deposit. Is it realistic to buy with a 22k one? However if pils gave you that money on the specific condition of using it as a deposit then it is between you, dh and your consciences to do what you feel is more beneficial.

Is the deposit money going to be for a house? In which case, at the moment, you are going to need all the money you can lay your hands on - the bigger the deposit the better the mortgage rate you will get.

Will your parents in law be happy for the money to be used for something else other than it was given for?

At the moment money on deposit is doing nothing but you'll be paying interest on your debt so if you are not going to be buying a house then you should use it to pay off debt because that way it will be "working hardest" .

Your monthly commitment of £650pm for your debt will be taken into consideration if you applied for a mortgage.

I am not sure what your debt is ie credit card/loan etc but the interest rate would tip it for me.

Use the saved money to pay off the £11k debt, then pay the £650pm that you currently pay for the debt into a savings account. That would mean you would have saved £7800 plus interest in a year.

Otherwise you are just chipping away at the £11k and no doubt paying interest which makes it go on for longer.

thank you. The money was given to us for a deposit which MIL feels is what we should do, however FIL said that it was a gift.The debt is on credit cards, which we swop onto interest free whenever possible.

We have paid off £5K in just under a year (£11K to go) it just feels never ending. I wonder if it would feel more positive to save £650 a month rather than to pay off £650 a month.

I personally would save £650 a month instead of chipping away at the debt - because your £650 a month will be taken up with some interest too.
Its a good feeling to be debt free (apart from a mortgage).

Do you need to tell your mil what you did with the money? Perhaps fil is more financially astute and can see the benefit of paying off one lot of borrowing (cards) before taking on a whole lot more (mortgage).

I suppose it just feels like a gamble (which neither of us are keen on): do we clear the debt and take the time to repay it and miss the boat on the property market, or continue to chip away at the debt and never be viable for a mortgage?

A crystal ball would be helpful

Ok if you pay off all the debts you have £11 left of deposit.

In 2 months time you will have £12300, it will mount up very quickly.

Missing the property boat? I don't think things will ever go back to how they were, I think larger deposits will be needed for some time to come.

Not meaning to pry, but if you have joint income of £55k, I bet if you put your mind to it you could save more than the £650 per month if you put your mind to it. And if its money that you can see mounting up and growing each month you would be more determined to save. At the moment you probably grudge that £650 per month so you don't pay more than that.

Thanks Flibbertyjibbet - DH certainly thinks we should pay it off, I think it's me being over cautious. I feel stupid that we have a large debt (although it wasn't racked up on stupid spending) but the whole situation is making me so stressed. I would feel like we are squandering the depsoit money (even though it would be paid back.)

I agree with fizzylemonade. Pay off the debt and savethe £650 per month for around a year. You are already close to making back the £11K paid off.

I'd pay off the debt first. The housing market will improve (of course), but my bet is that it will be gradual. IMO, it will be a long time before the market recovers to the significant annual price gains of the past few years.

I would pay the debt off, to avoid paying any interest on it, and then start saving as much as possible.

Another reason I'd pay the debt off first is that (often) being a first time homeowner is a bit of a financial shock.

You never quite realise just how expensive it is to own until you are the one putting in a new boiler, or paying to call out the plumber, etc.

Unexpected expenses crop up at the most inconvenient times, and ongoing maintenance is expensive too. Being debt-free puts you in a much better position to respond without getting into a financial bind.

I would pay off the debt:

• Mortgage companies will take your debt and current repayment levels into account when considering affordability, and since they're currently looking at any reason not to give a mortgage, that could stop them giving you one, thus defeating the object of having the deposit
• The deposit will hardly be earning any interest, so even if the debts are mostly on 0% credit cards, there's no point in keeping the savings to earn interest
• If something happens to either of your jobs, it's a lot nicer to be sitting on no debt and a small deposit than a new house, mortgage and a debt.

I think it would feel more positive to save, than to pay off. Saving for something is a big incentive to cut back, whereas paying off a debt feels like a chore - regardless of the fact that it is the same amount of money!